Porcupine musings

Do carts push the horse?

2012-02-01T16:54:00.001-05:00

President Obama remarked in the recent state of the union address that he is “proposing that every state require that all students stay in high school until they graduate or turn 18.” A laudable goal (for students to finish school) however the idea that this goal must be forced upon the student by the state is a symptom of how some confuse cause with effect. The effect they wish to see is a “successful” adult and they mistakenly assume that completing school causes this. Motivated individuals will complete schooling just as naturally as a fish swims in water (it is inherent to their nature). Forcing unmotivated individuals to graduate will no more make them successful than does teaching a man to swim make him a fish. Besides, what is the plan here? Jail or fine the student or parents if the kid doesn’t graduate?

Before college tuition costs had ballooned out of control it was only students that had a genuine interest in expanding their knowledge and skills that went to college. These individuals were naturally driven to be successful; going to college was simply a way station on the road to success. Those in government looked at the statistics and saw that successful people had gone to college and thus they confused correlation with causation. Government enabled more and more to attend college each year and thus the floodgates opened to not only ever increasing tuition costs but also a new generation of students where college is no longer viewed as an opportunity to grow one’s knowledge and skills but rather a rite of passage that one is obligated to endure in order to assure “success”. Those that simply endure it exit with a degree and a slightly greater perspective on western culture than your average high school graduate, but that’s about it (oh, and the morale crushing debt burden).

The ultimate goal of government subsidization of college education is nothing short of 100% college education for every citizen. But it should be obvious that were this to be achieved nothing will be gained. If everyone has a college degree then how is that supposed to lead to a high paying job? Salaries depend directly on the number of people capable of performing the desired task. That’s why janitors don’t make much money (everyone can clean) and brain surgeons make a lot. If everyone has a college degree then you’re competing with everyone… that’s a lot of people! So wages will go down for jobs that formerly required a college degree (over supply of labor). Wages will remain high for those that excelled in college (constrained supply of labor). But those were the people that used to be the only ones going to college. So nothing will change, wage disparities will remain since wages are driven by supply and demand. If you don’t believe me then just look at the unemployment levels among recent college graduates, the stories of college grads living with their parents, or college grads working at low paying jobs because they can find no other work. These are all symptoms of oversupply, in this case one that is artificially driven.

It’s not the student’s fault. They’ve been duped by promises of the moon if they can just cross the finish line. So they waste their time on useless (for real world jobs) degrees (i.e. anthropology, women’s studies, etc) that have no value to an employer. However, as with most government policies, the unintended consequences of subsidizing college education are coming home to roost. Turns out there is a large labor shortage in this country: a shortage of skilled trade labor. Because culturally and governmentally we look down on such trades there are fewer and fewer capable of performing these jobs. I suppose when a plumber makes as much as a lawyer the tide will turn naturally, but the point is this “bubble” of unemployable college grads would not exist if government had not meddled in the higher education market.

The Minimum Wage fallacy

2012-01-24T13:24:00.002-05:00

One of the more pervasive economic myths is the need for a mandated minimum wage. This belief is the manifestation of an irrational fear. The fear is predicated on the notion that absent a minimum wage employers would pay the absolute lowest subsistence wage. For the sake of argument let us assume this is true. Were this true we would predict the following: (Given) employers strive to pay the least amount possible (Given) the minimum wage is the lowest legal wage, (Conclusion) employers would pay only minimum wage to the majority of the workforce. What do we find if we would look at actual wage data? As of 2006 a mere 2.2% of US workers (http://goo.gl/nw08Z) actually make minimum wage. Therefore we can conclude this argument is irrational and without merit.

Now the argument switches from an “evil employer” focus to a “safety net” focus. The safety net argument presumes ALL workers require sufficient pay to independently support themselves. Not all workers are the same however, nor do they all have the same goals. Many workers (e.g. teenagers) are inexperienced and do not need to work for self-sufficiency. Such workers would be happy to receive a starting wage in exchange for the opportunity to gain work experience while earning some spending money. By “happy” I mean they would prefer that versus no job at all. However “no job at all” is what most of them (and other low-skill workers) encounter because the minimum wage is higher than their productive capacity. With the recent increase in the minimum wage this is exactly what we got. As of 2011 unemployment for those 16-24 was over 50% (http://goo.gl/ZzgKC). It doesn’t make sense to pay someone $7.25/hour for $4/hour work. The net result is that the unskilled and inexperienced never get the opportunity to get their foot in the door to gain the experience they need so they can demand a higher wage. Low starting wages are a stepping-stone to higher wages. Outlawing low wages is like outlawing the 1^st grade in an attempt to eliminate illiteracy among 1^st graders. Kids don’t stay in the 1^st grade their whole life just as the same people aren’t making low wages their whole life.

The minimum wage overprices the unskilled out of the labor market (would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?) thus it reduces the supply of available workers which then drives up wages for the skilled laborers as they are now not having to compete with low priced labor. This is why unions are ardent proponents of the minimum wage. It is not for altruistic “help the worker” sentiments, but rather because it benefits unions by restricting the pool of cheap labor that might otherwise compete with union labor. The best example of this union-government cronyism is the Davis-Bacon Act of 1931 (http://goo.gl/kHmKf).

Perhaps the best argument against the minimum wage though is to accept the assumption that the minimum wage is a good idea. Let us imagine we raise the minimum wage to $40/hour. Surely that would eliminate poverty once and for all! But here’s what would happen – all industries employing workers making less than $40/hour would see their employment costs skyrocket. Those industries that have elastic pricing (e.g. fuel, food, utilities) would be able to pass the higher costs on thus decreasing the gains from the increased wage. Those industries that have inelastic pricing (e.g. discretionary leisure goods) would not be able to increase prices. They would go out of business. This would create unemployment due to the destruction of entire industries.

When the minimum wage is high these problems become apparent, but these same problems nevertheless exist at smaller scales. The irony is that the minimum wage is putatively sold as helping those most in need of government assistance, the unskilled worker, when in fact it actually harms those workers by preventing them from gaining employment. But I guess that’s why they invented welfare. Better to pay someone to do nothing than work for “too little.”

Price Gouging

2012-01-17T10:11:00.000-05:00

Economic freedom is a willing buyer purchasing from a willing seller at a mutually agreed upon price without state interference. Curtailment of this freedom occurs if one party feels the terms of the prospective sale are unsatisfactory and so utilizes coercive state force against the other party. When the seller does it we call this “minimum price fixing” (e.g. minimum wage laws, crop price controls, etc.), which makes it a CRIME to sell below a government-mandated price. Likewise a buyer desirous of similar protection will petition the government to invoke anti-gouging laws or “maximum price fixing” which makes it a CRIME to sell above a certain price.

Price gouging is nearly universally reviled. Surely this is one place where we can agree that the government needs to step in, right? Wrong. There is nothing wrong with price “gouging” or “scalping”. These actions are merely manifestations of the law of supply and demand. Supply goes down, price goes up. This attracts other sellers, which thus opens the floodgates of competition, which increases supply and ultimately drives down price. “Gouging” is beneficial for two reasons: (a) it promotes a needs based market driven rationing of a scarce resource and (b) it ensures a consistent supply of a scarce resource.

A rising price ensures supply never goes to zero by incentivizing reduced consumption. No matter how scarce a good becomes there will always be some of it available to those who truly require that resource because they are willing to pay. If price is artificially suppressed when supply is short this invites those with early information to consume as they normally would, leaving none for those truly in need. Raising prices gives everyone an equal opportunity to partake in the resource even if they are last in the information chain. Some might say the rich have an unfair advantage, that they could buy everything up if we don’t force arbitrary rationing. But this is illogical. The argument is basically that the wealthy are compelled to buy up all expensive goods in short supply. Funny, there doesn’t seem to be a shortage of diamonds or gold watches. Some might then say the “poor” are excluded when price goes up. Perhaps if the price of gas went to $10,000/gallon, but in practice that can’t happen. Prices can’t exceed the level at which the population can pay. If they did the seller makes no money, so he must lower price until people are willing to pay. It will be less burdensome for the wealthy to pay higher prices, but that’s no different than during “normal” times. So if we don’t need government price controls during “normal” times then we don’t need them during “shortage” times.

High prices also afford the seller the ability to ensure continuing access to a scarce resource. For example, when Hurricane Katrina destroyed refining capacity it affected gas prices in Georgia. Gas prices went way up the next day. Surely this is unfair, right, the cost of the gas in the tanks didn’t suddenly go up overnight? No, this means the owner is exercising good business sense. Just think about it. If the station did not raise prices the amount of money they would get at the old price would not be enough to buy an equal quantity of “new” gas. This would only exacerbate the shortage. Raising price on current inventory ensures that the seller can completely replace it with more expensive inventory and outbid other stations if necessary. Sellers can’t provide their customers with a service if they have nothing to sell due to artificial price restrictions. Who do price restrictions help? No one. Or rather it helps the lucky few that buy early but only to the detriment of everyone else.

Even though at face value government control of economic relationships might seem beneficial (“stop those evil gougers”), ultimately unintended consequences end up harming the very people it was purported to help. If anyone has an area that they believe government should exercise economic controls please send me a note at morin.greg@gmail.com and I will gladly do my best to debunk it in an upcoming column.

The “Buy Local” Canard

2012-01-09T08:35:00.000-05:00

One of the most compelling economic myths is that of “buy local.” On its face it seems a rather compelling argument: spending money locally keeps local businesses going and keeps that money in the community. Such a policy is easy to praise because we see the positive effects, but what we don’t see (the “unseen” harm referred to by Bastiat) is the sales that did not go somewhere else… and those sales result in less income for “non-locals” by which they can come and buy “local” from us. So, there might be a small temporary uptick in the local economy, but eventually equilibrium is restored. The root of this myth is predicated on a jingoistic guilt trip. The “localness” of a business is elevated to being the sole consideration in one’s buying decisions (e.g. “buy “American” not because it’s the best, but because, well, it’s your patriotic duty!”).

The jingoism argument is that people should buy only goods and services sold within that community. The problem is that “community” is a completely arbitrary distinction. For example, we are told we should “buy American” because it’s good for America. But then we’re told we should buy “Georgian” because it’s good for the state. Then we’re told we should strive to buy “Morgan” because it’s good for the county. Then we’re told we should buy “Madison” because it’s good for the city. So, if we follow this argument to its logical conclusion, then we should then further strive to only buy goods from people that live in our neighborhood, right? And one step further would mean we should only buy goods made by our family members. And finally, finally, the best would naturally be if we only did everything for ourselves. Crazy result, right? This is why it is important that if you are going to make an argument, you understand the logic of the argument and test all scenarios using that logic. If the outcome is deleterious at the end of the logic chain then it must be deleterious along the chain.

You can’t be “buy American” and “buy Georgian” at the same time. Buying from Idaho would be buying American but not buying Georgian, so clearly you can’t buy from Idaho. Oh, right it’s ok to buy “non-locally” if whatever you want isn’t made “locally”. So, if it is sold in Alabama and Georgia, then the more desirable path is to buy from Georgia? Unfortunately this argument presupposes an impossible world. It assumes a world where Business A in Alabama and Business G in Georgia make absolutely identical products, provide an identical level of service and provide identical pricing (free shipping). If every metric of the two businesses were absolutely identical then there’s no upside or downside to buying local. The outcome is neutral because in this hypothetical utopian scenario it also means an Alabama resident has no more impetus to buy local or from Georgia than does the Georgia resident. But, since there has never been and will never be identical businesses competing, we should make our buying decisions not on an arbitrary metric like geographical coordinates, but rather on differences in what or how something is being sold. Choose based on quality, service, or price, not on arbitrary characteristics.

Exhortations to purchase based solely on arbitrary traits of the business (location, gender, race, religion, etc.) are actually discrimination. It is just as discriminating to choose to only associate with others because of an arbitrary trait as it is to choose to not associate because of that trait. And while I will defend one’s right to associate as they see fit, I also have an obligation to point out the flaws in the arguments made to support those decisions. If a “local” business is so uncompetitive that the only way it can gain sales is to participate in jingoistic appeals, then perhaps it should go out of business to make room for the next guy who can sell a product so good nobody cares about where it’s located.

Mind Your Own Business

2012-01-02T18:26:00.003-05:00

Ron Paul is frequently accused of having an “isolationist” foreign policy. The media and the other republican candidates giddily overuse that word (perhaps because it has 5 syllables and they think it makes them sound erudite)…but in the immortal words of Inigo Montoya (The Princess Bride), “You keep using that word. I do not think it means what you think it means.” Ron Paul’s foreign policy is one of non-interventionism, not isolationism. Isolationism means that a country cuts off diplomatic ties, closes its borders, and invokes high tariffs. That is not what Ron Paul is advocating at all.

Non-interventionism simply means we mind our own business. It means closing hundreds of foreign military bases. If the prospect of closing these bases is held as being “isolationist” then apparently Canada, China, and India are all “isolationist” as they lack foreign military bases. Is it really a threat to national security to close our bases in Germany, bases that are a relic of a war that ended 67 years ago and that exist in a country that poses no threat to us? What is the point? Are we afraid that if we close those bases suddenly Russia will invade Germany? Give me a break. Closing bases doesn’t mean we forego operational readiness. Water covers 70% of the planet, so a strong ocean presence will ensure that we are capable of responding to any threat.

Our foreign policy in the Middle East is a tragic comedy. It is the consequence of unpredictable outcomes that results from operating under the delusion that we are in control. For example, in 1953 the US openly overthrew (operation Ajax) the elected prime minster (Mosaddegh) of Iran, which allowed the Shah to assume power. These actions fomented anti-American sentiment, which culminated in blowback in 1978 with the Iranian revolution and hostage crisis. Iraq, under Saddam Hussein, then opportunistically invaded Iran in 1980 owing to the disarray caused by the nascent revolution in Iran. We didn’t like Iran anymore so we backed our ally Iraq and supplied Hussein with weapons. Russia invaded Afghanistan in 1980. We didn’t like Russia so we supplied the Mujahedeen, led in part by Osama bin Laden, with weapons. Then Iraq invaded Kuwait using the weapons we supplied them with during their war with Iran. That invasion led to US military bases on Saudi Arabian soil. bin Laden despised the bases so he became our enemy. His attacks during the 1990s climaxed on September 11, 2001. 9/11 was the culmination of blowback from our foreign policy for the prior 50 years.

Simply recounting these events does not mean that we “deserved” the attacks or that they were “justified”. It merely explains how our interventionist actions got us from Point A to Point B. If I keep poking my brother in the eye until he hits me upside the head with a baseball bat I certainly do not deserve such an extreme reaction, however I’m not totally blameless and innocent. Actions have consequences and they often are not the ones you expect. If non-interventionism had been US policy then the Iran hostage crisis would not have occurred and Iraq would not have invaded Iran or Kuwait. So, there would have been no US-Iraq wars and no US military bases in Saudi Arabia. Without those bases bin Laden would have taken no interest in us.

Imagine if China openly interfered in our elections and installed a puppet communist regime. Imagine then if China established a military base in the US ? Do you not think we Americans would resent this greatly? Of course we would, so why should we expect any different when we do the same to other countries? The path to peace is to mind our own business, maintain a deterring military force, and promote free trade to all countries (sanctions are an act of war). The “selfish” motives of capitalism will ensure peace. Why? Invading and killing your customers is bad for business.

Incentives and Taxes

2011-12-26T17:29:00.000-05:00

Bill O’Reilly is disingenuous when he says high taxes might compel him to quit his lucrative job (http://goo.gl/c6MQy). Although there is a level where taxes can have that effect (why engage in challenging work if taxes limit your income to that of someone flipping burgers), we are nowhere near it. However, taxes and regulation do result in a net decline in businesses and jobs albeit by a different mechanism than “quitting”. The mechanism is attrition. Businesses fail due to normal changing market demands, bad luck, poor leadership or other reasons. New businesses take their place, however as taxes and regulations increase, the rate of business replacement declines. Why? Some business ideas are high risk and some are low risk and both types may have a high or low reward. A graphical metaphor works best here (Figure 1).

Imagine a square, the left side indicates increasing reward (bottom to top) and the bottom indicates increasing risk (left to right). As taxes and regulations increase it makes those endeavors in the lower right corner (high risk-low reward) less appealing because of reward diminishment (taxes and regulation costs consume the reward). As taxes and regulation climb we continue to move across the square from lower right to upper left along a diagonal front: everything to the right of the diagonal will not be attempted, everything to the left will be attempted. As taxes and regulations continue their march upward that diagonal shifts further and further to the left until the only thing remaining is extremely low risk-high reward ideas.

Why should taxes and regulations yield such a result? Let’s say you need an income of $50,000/year to live on and you start a business with a 2:1 return on invested capital. That means if you invest $25k you’ll reap a profit of $50k. If you are taxed at 50% then you will be left with only $25k. So you would steer clear of investing in such a business since the reward is insufficient for your needs. You would only invest in a business that had a much higher return on capital, at least 4:1. The aggregate net result is that a lot of otherwise profitable businesses simply don’t get started or funded because their potential for gain after taxes simply isn’t worth the risk relative to other ways the money could be spent. And if no potential projects exist with a sufficiently low risk and high reward then investors simply sit on their cash until one does come along.

Some hold the condescending view that if a business can’t turn a profit after taxes then it just shouldn’t exist. The presumption is that if people aren’t willing to pay a price with large embedded taxes and regulatory costs then they have no right to such a good or service. The fatal flaw in this reasoning is an assumption that it is impossible for there to exist a level of taxation or regulatory burden that is unjustifiable. This mindset leads to business destruction. When a business is caught between government mandated costs and the unwillingness of the public to pay prices that reflect those costs then that business is squeezed out of existence.

If ten businesses fail each year and only seven new ones start there will be a net decline in businesses. Absent high taxes and regulations there would have be another five that would have opened. We don’t see what wasn’t created so there is no obvious cause and effect at first glance. Analyzing the problem from an economic incentives framework quickly reveals the source of the problem. Regulations and taxes are like a flood – they drown everything in its path. To restore prosperity we must allow good ideas to flourish by removing the artificial shackles that incentivize only low risk-high reward ventures.

Worldwide Police State

2011-12-22T18:53:00.002-05:00

The Dec 16, 2011 passage of the National Defense Authorization Act (NDAA) (http://goo.gl/4TBoH) was a dark day in American history. In short it (a) expands the “battlefield” of the “war on terror” to the entire planet and (b) it permits the indefinite detention of a suspect (including US citizens) without any appeal rights. Although this Act has been authorized annually for the last 48 years, this is the first year that it has codified questionable implicit powers. The implicit nature of those powers has always been debatable but that’s not the issue. The issue is that the explicit powers granted basically gut the 4^th , 7^th and 8^th Amendments for any covered person who is “determined to be a member of…a…force that acts in coordination with…al-Qaeda” (Sec 1032(2)(a)). There is a provision in Section 1031 exempting US citizens. But, as they say, the devil is in the details. Only citizens “arrested in the United States” are exempt. If you’re travelling, then all bets are off. Furthermore, that exemption does not apply to Section 1032. Section 1032 “requires” indefinite detainment only for non-US citizens. US citizens meeting the definition of “covered person” for the purposes of Section 1032 may be detained “without trial until the end of the hostilities” in the sole and arbitrary discretion of the Executive branch.

One problem is that the definition of “covered persons” is open to interpretation. What is a “force”? Perhaps it is an anti-war political movement? Perhaps speech in support of closing military bases and ceasing hostilities in foreign lands could be considered as acting in coordination with al-Qaeda? If you think that’s a stretch think again. History shows that those who believe in the mantra of “the ends justify the means” are willing to justify the most horrific crimes. One recent example of twisted interpretations: would you consider someone that minted silver coins and sold them as being a domestic terrorist? As absurd as that sounds the US government does, as exemplified in the case of Bernard von NotHaus earlier this year (http://goo.gl/QqB3j). An attorney for the government stated that “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country.” If minting coins is terrorism then there is no limit to what the government can arbitrarily slap that label on. And if you don’t think you have anything to worry about because you’re not a terrorist then think again. What would happen if you were mistakenly arrested under the authority of this act and indefinitely detained? Even though you are innocent you have no right to a hearing to prove your innocence. A secret “determination” of your guilt is grounds enough to lock you up. Mistakes happen. This act only works in a world where government is clairvoyant and infallible. And here are a few things that can get you on the potential terrorist watch list: more than 7 days of food in your house, buying flashlights, paying in cash at hotels, texting privately in public, own precious metals or owning guns and ammo (all are public FBI/DOJ/DHS info).

This act starts the slippery slope toward a total police state. Don’t like something, simple, just call it “terrorism” and then lock up offenders without trial for the rest of their lives. And I do mean “the rest of their lives” because the “war on terror” will never end. Real terrorism can never end because it is simply a symptom of our species’ propensity toward violence. You might as well declare war on aggression, jealousy or selfish behavior.

But perhaps what is most frightening is how overwhelmingly it passed (93-7 Senate and 283-135 House). It’s nice to see that Democrats and Republicans can agree on one thing: trampling our rights. As Benjamin Franklin said, “People willing to trade their freedom for temporary security deserve neither and will lose both.”

The War on…Happy Meals?

2011-12-15T14:40:00.002-05:00

The city of San Francisco enacted a law that went into effect on November 30, 2011 (http://goo.gl/RDKm1). It bans any chain restaurant (i.e McDonalds) from providing a toy with a meal that the overlords of that city decree does not meet an arbitrary nutrition standard. Clearly McDonalds is attempting to ensnare unsuspecting children with toys that are as irresistible as the One Ring was to Gollum. Parents’ and children’s brains are completely incapacitated by these toys and they are unable to exercise any free will and thus have no choice but to purchase a Happy Meal. Yes, I’m being sarcastic. I’m not even going to delve into the most obvious discussion here, i.e. that this is a prime example of nanny-statism at its worst, that government can interfere in transactions between a willing buyer and a willing seller because condescending politicians believe it is morally acceptable to substitute their preferences for that of the citizens. Although McDonalds has skirted the ban by charging 10¢ for the toy the underlying issue here has been overlooked in the media. They weren’t trying to stop McDonalds from providing a toy. They set standards for fat and sugar content, which if met, would permit a toy. So the authors of the law, like the unsuspecting chess player who overlooks his own vulnerability while attacking, thought it would force McDonalds to change the content of the meal. They failed. The toy remains a meal incentive to not only the children but also the parents as well, who are now guilt tripped into buying the meal since the toy money goes to charity. Touché McDonalds! Obviously the instigators of this law don’t have children, because as any parent will tell you, children will not eat what they don’t like. Period. No kid is going to eat a happy meal populated with apple slices, carrots and yogurt no matter how many toys it comes with. If the promoters of this law got their way, here’s what would happen: the child takes the toy, nibbles on one thing and then throw the rest of the meal out. This outcome mirrors the primary problem with the school lunch program. Let me explain. If school lunches meet federal nutrition guidelines then the meal is partially paid for (subsidized) by the government. So a $5 meal becomes a $2 meal. Great. The only problem is that kids throw away the stuff they don’t like. So what could stop them from throwing out food? Simple, just let the kids pick what they want. Problem is, if they do that then the meal no longer meets federal guidelines, so it can’t be subsidized. Now the meal is $5 with LESS food. It’s cheaper to buy the whole thing, eat what you want and throw away the rest then to just buy and eat what you want. But like a stubborn 3 year old, government stamps its foot down and insists we continue on the same failed course because it is “best”. When will they ever learn that you can’t alter human behavior by mandate? Government should not subsidize meals for those that can afford it. The program has slowly morphed from alleviating starvation among poor students, to subsidized food for all students, to nutrition nannies that incentivize wasting food. The argument that we must subsidize all meals is that if we didn’t then poor students might be ridiculed by their peers (the same logic was also used to force TARP money onto banks that didn’t need it). So in order to protect against possible hurt feelings we as a country subsidize all meals to the tune of $16 billion/year (http://goo.gl/nm53h). The least we can do is alter the program so as not to incentivize discarding thousands of tons of food every day across this country. Provide healthy options and let the kids pick what they want. To continue doing otherwise is blowing against the wind.

Be thankful for…Capitalism

2011-12-01T08:06:00.001-05:00

In May 1607 the first American settlers from England arrived in North America and established a colony at Jamestown, Virginia. It was a veritable Eden: rich, fertile soil, abundant fish, game (deer and turkey), fruits, and nuts. By November 1607, 66 of the 104 colonists were dead (due mostly to starvation). In 1609 the Virginia Company attempted to “reboot” the colony with another 500 settlers. Within 6 months 440 of them were dead, again due to starvation.* How was this possible? How could so many perish among such abundant natural resources? Were they unprepared? How could the same thing happen two years apart? The answer lies in the words of an eyewitness, who stated that the famine was the result of a “want of providence, industrie and government, and not the barenenesse and defect of the Countrie, as is generally supposed.” Translated into modern English: it was the result of a lack of work ethic, effort and self-discipline and not due to any problem with the environment. But how is this possible? Surely the Virginia Company (the entity contracted by the British aristocracy to establish the colony) would not recruit a bunch of lazy slobs to run their very costly endeavor in the New World? No, the fault did not lie with the settlers per se but rather with the Virginia Company itself. The settlers were (willing) indentured servants. They agreed that if the Virginia Company would pay their way to the New World (a not so inconsiderable sum at that time) then they would labor for the benefit of the Virginia Company for the next 7 years. The fatal error the company made was in heeding the words of Plato (who advocated collective ownership of land). They decided that all land and production therefrom would be held in common, the colonists would take from that stock what they needed and the remainder would be for the company. The company feared that if each colonist owned his land he would farm just enough for himself.

The failure of this collective ownership arrangement was a result of human nature, which leads to the “free rider” problem. Humans are inherently lazy. When given a choice between more work and less work to accomplish the same goal we will choose less work (why use a hammer if you can use an air-nailer?) In a communal system it is easy to hide indolence behind the work of others. For example, if 10 men produce 100 bushels of corn per month (total of 1000 bushels) and from that they are allotted 1% of the total output for themselves each month (10 bushels), then if one man slacks off and only produces 50 bushels then what he gets back is not cut in half, rather it is only cut by 5% as he gets 1% of 950 bushels or 9.5 bushels. Once everyone realizes they can “free ride” on the work of the more industrious (as some might increase output in a noble but futile effort to make up for the slackers) total output will decline. Or stated differently, if something is Everyone’s responsibility, then Nobody will do it.

How was the starvation problem finally solved? In 1611 Sir Thomas Dale was sent to serve as the “high marshal” of the colony. He recognized the problem and instituted a system in which each man was given 3 acres of land that he would own and farm.* All that was asked in return for ownership of the acreage was a lump sum tax for the colony of 2.5 barrels of corn (note, it was not a percentage of his output but rather a lump sum head tax!) The colony immediately began to flourish. Now rather than an incentive to decrease output and slack, each man had an incentive to produce as much as possible because he could keep the excess. He could now use the excess to trade with the Indians for furs and other goods. Trade also had the side benefit of helping to maintain peaceful relations with the Indians (why risk life and limb in warfare to get something when you can just trade for it).

This conversion from a communal property system with rampant starvation to a private property (capitalist) system with abundance was not a fluke. The same thing happened again at Plymouth, Massachusetts in 1620. After three years of starvation and death the governor of the colony, William Bradford, finally realized the problem and ordered that they “should set corn every man for his own particular, and in that regard trust to themselves…”* In other words, private plots of land were established for each family to farm themselves.

Why does this notion of communal property keep appearing throughout history? Why does it intuitively seem like it should just “work”? Perhaps because we are already familiar with the one and only place it can work: the family. A family is the ideal setting for a communal system because it is (a) small and (b) members are bound to each other by love. There is no incentive to free ride because (a) you’ll be caught and (b) you’ll harm those you love. The fatal error is in assuming that what works in a small group can work in a large group. This can never be due to an alteration of the incentive structure as the group size and character changes. No one will ever love their neighbor to the same degree as they love their own family.

* “How Capitalism Saved America”, DiLorenzo, Thomas J., 2004, Chapter 3.

Tom Bethell, The Noblest Triumph: Property and Prosperity Through the Ages (New York: St. Martins’ Press, 1998).

Warren M. Billings, ed., “George Percy’s Account of the Voyage to Virginia and the Colony’s First Days,” in The Old Dominion in the Seventeenth Century: A Documentary History of Virginia, 1606-1689 (Chapel Hill: University of North Carolina Press, 1975), 22-26.

Philip A Bruce, Economic History of Virginia in the Seventeenth Century (New York: Macmillan, 1907).

Gary M. Walton and Hugh Rockoff, History of the American Economy, 9^th ed. (New York: Dryden Press, 1998), 30.

Mathew Page Andrews, Virginia, The Old Dominion, vol 1 (Richmond, VA: Dietz Press, 1949), 59.

William Bradford, Of Plymouth Plantation, 1620-1647, with an introduction by Samuel Eliot Morison (New York: Knopf, 2002), 116.

Samule Eliot Morison, The Story of the “Old Colony” of New Plymouth (New York: Knopf, 1960).

Larry Scweikart, The Entrepreneurial Adventure: A History of Business in the United States (New York: Harcourt Brace, 2000), 37.

Jeremy Atack and Peter Passell, A New Economic View of American History, 2^nd ed. (New York: Norton, 1994), 50

Legalize Stupidity

2011-11-17T09:29:00.001-05:00

If you were offered raisins, crickets or pebbles would you prefer that they were chocolate covered or plain? They would seem palatable at first if coated with chocolate, but after a few bites you would know their true nature. Everyone prefers to see things in their unadulterated form if there is risk of ingesting something distasteful. Oddly though this natural preference is artificially negated when we interact with groups of individuals. Some groups (businesses and social organizations) are legislatively required to pretend to be something they are not. In less abstract terms I’m referring to anti-discrimination laws. Before I go further let me dispel any misunderstandings – I am not in any way endorsing or promoting bigoted behavior. It is socially and morally reprehensible… but that does not mean it should be legally reprehensible. Some might say immoral behavior should be outlawed. I disagree; it is not the place of the state to impose morality on society (unless you’d like to live in a theocracy like Iran). If you want someone to adopt your morality, lead by example, not by force.

Our laws treat groups of individuals differently than they treat the individual even though there is no logical basis to do so. For example, if an individual does not allow certain types of people into their home or does not purchase goods from them they are free to engage in such behavior. But if we substitute the word “individual” with “group” and “purchase” with “sell” it suddenly becomes a criminal action. This is arbitrary and illogical. Why is it ok if one person does it but not ok if two people do it? I’m not advocating that we impose anti-discrimination laws on the individual though; rather we should repeal anti-discrimination laws. That does not mean I’m “pro” discrimination. Rather, I’m pro transparency. For example, if you are seeking employment and the government has forced the discriminatory employers to behave as though they are non-discriminatory then how are you going to discriminate yourself between the good and the bad employers? I often read of court cases where people fall into this trap. Only after many years of employment do they finally realize the employer is actually bigoted and they either have to quit or file a lawsuit. Even if they win why would they want to keep working for an employer that they know is bigoted? As an employee I’d much rather know what kind of company I might be working for in advance so I can avoid the jerks and work for an employer that will treat me right. A good employer will flourish in a system where they can attract the productive employees that the shortsighted discriminatory firms are ignoring. In such a system the discriminatory firms will atrophy and die. Why? Because they have restricted themselves to a narrow talent pool that ignores potentially more productive employees. Productive discriminated employees will go to the non-discriminatory firms and help them outcompete the discriminatory firms. Additionally, the public would cease to patronize such discriminatory firms were their true nature known. In other words, the market spontaneously regulates such bad behavior by punishing those groups stupid enough to hold such unacceptable positions.

The knee jerk reaction against the idea of eliminating anti-discrimination laws is based on the faulty premise of believing government is our savior by citing the civil rights laws of the 1960s. Government simply fixed the very problem it had created. Discriminatory Jim Crow laws were upheld and enforced by government fiat. However after nearly 50 years the most serious wrongs have long since been righted. There is no longer a reason to outlaw stupidity. Please, let us see who the stupid people are so we may ourselves discriminate and avoid them entirely.

Tax Fairness: Answers to questions on the Equal Tax

2011-11-03T08:11:00.002-04:00

The Equal Tax (a head tax system) treats all citizens equally. It is the homeowners association model – everyone pays the same fee regardless of their income level. Those that believe in wealth redistribution won’t like it but then again thieves don’t like security systems. So, without further ado:

Arguments against the Equal Tax – Answered

1) How would you collect the tax? Government becomes just another service paid for monthly, like a cell phone bill. You could choose to pay it all at once or have it drafted monthly or weekly. Your employer no longer acts as the middleman for the IRS. All immigration laws would be repealed and every immigrant gets an ID# for tax accounting (an increase in the population would naturally drive the tax down as the required budget is divided by a growing population).

2) What about those that sneak in and don’t pay the tax? Without immigration restrictions there is no incentive to sneak in. Immigrants will gladly sign up to get their ID# so they can reside here legally. To catch the few that would try to cheat the system we would employ the honor system found in many subway systems. In these systems there are no turnstiles, anyone can go through whether they have a ticket or not. This works because the fine for not having a ticket is extremely steep…virtually no one risks it (would you risk a $1,000 fine to avoid a $1 ticket?) High risk and low reward incentivizes compliance.

3) It’s not “fair” because the wealthy would pay little relative to their income! In no other arena of goods or service purchasing are we asked what our income is before we are given a price. The price of a gallon of milk doesn’t change depending on who is buying it. So why should the cost of government services change depending on who’s buying it? Paying based on income is subsidization. Subsidization is theft. Last time I checked, theft is considered unfair.

4) The per capita cost would be too high because the wealthy would no longer be subsidizing it! Exactly! It would force a reduction of our bloated government. If government were cut down to its core functions (defense, justice, contract enforcement) it would be affordable for everyone (considering that all income, property and sales taxes would be abolished). The tax would be driven downward as voters demanded ever more efficient government.

5) And what of the poor, this would surely harm them the most? Not at all. It would drive up their wages by an amount at least equivalent to the additional tax (and employers could easily afford that as they aren’t paying income and payroll taxes). Why would it drive up wages? Consider: if you are the sole wage earner for a family of four and make $15k/year and your tax bill just went up by $10k, you’d be a fool to work for anything less than $25k/year – NOBODY would work for less thus wages would necessarily go up (market based minimum wage). Likewise costs of goods would drop as the tremendous tax burden built into every good and service is eliminated. Everyone would be much better off in terms of purchasing power.

6) What about those that are disabled or on fixed incomes? Private charities would step in to assist people truly in need of tax help just as they assist them with their other needs today. Charity donations would explode because of the dramatically lower tax burden. Those on fixed incomes would no longer owe income, property or sales taxes and as described in Question 5 the purchasing power of their dollars would go up – so they would be much better off.

The idea of a progressive tax system has been ingrained into our psyche since birth so I can understand why the Equal Tax might seem bizarre. But if you consider the logic behind it, it is undeniably the best tax system. It is fair. It is fraud proof. It incentivizes smaller government. What more can you ask for?

Tax Fairness: Solved with the Equal Tax

2011-10-31T09:52:00.002-04:00

Our tax systems (income, property, sales) share a common problem. They are applied in a discriminatory manner that harms some to the benefit of others. Rather than discrimination based on race or gender it is discrimination based on behavior or actions. Those that behave in a government desired manner pay less. Those that are good at hiding income or gaming the system pay less. Everyone else pays more. These systems are easily bypassed both purposefully and accidentally thus driving up tax rates in order to compensate for such losses. Lastly, they can transform the average citizen into an unwitting criminal if they happen to take a wrong step in the minefield of tax rules. In short they are an imperfect and unfair mess.

A fair tax system would have a universal/non-discriminatory method: applicable to all permanent residents. It would have an inescapable calculation method: one’s tax bill would be based on a single universal metric and would not be a function of an individual’s behavior. What is this perfect tax system? I call it the “Equal Tax” which is otherwise known as a capitation or head tax. Each and every person would owe the same amount of tax.

What problems does the Equal Tax solve?

1) Fairness: The foundation of “fairness” is universality. Rules in a game are “fair” because they apply to all players. So too with this tax: it applies to every man, woman and child residing in the US. The measure (i.e. amount) of this tax will be driven to the lowest level possible. Rather than congressmen attracting votes through local pork-barrel projects (i.e. leading to higher taxes) they will be compelled to garner votes by delivering what their constituents now want: perpetually lowering the tax burden. This inherent incentive of cost reduction will necessarily drive the genie of big government back in the bottle until government is reduced to its core essential functions.

2) Fraud: It is inescapable. There is no point in hiding income, no point in understating your home’s value, no point buying over the internet solely to avoid sales tax…your tax bill is the same as your neighbors and it isn’t going to change based on anything you do or don’t do. Payments won’t be 100% every year, but at least we’ll know exactly how much revenue is short rather than pie in the sky guesses.

3) Impossible to inadvertently violate tax laws. There are no complex rules to follow. You owe $x each year. Period. If you don’t pay it, you know you’re not paying it, so it can’t be accidental.

4) Engagement of all citizens in the political process keeps government in check. Congress will hear from every citizen “Why are we funding that program? It’s costly and I’m PAYING for it, get rid of it.” This would force government to provide only the essential functions that everyone agrees on. In short, it would force government to remain affordable to even those with the lowest income thereby imposing real restraint on the growth of government.

How much would it cost? Assuming all Federal, State and Local governments adopted such a method and only core functions of government are funded it would cost roughly $2400/year/person (based on US Budget figure for 2010 (publicly available at Wikipedia) and public figures for local county and state budgets). I’m sure the idea of the Equal Tax has raised a lot of questions, some of them good and valid and some of them unthinking knee-jerk reactions. I’ll answer both types of questions in next weeks’ column.

Tax Fairness: What is it?

2011-10-31T09:51:00.002-04:00

I wish someone would explain the objective criteria used to define “fair share” as it pertains to taxation. This term is used indiscriminately by those that assume everyone else’s internal fairness meter must be the same as theirs. Unfortunately “fair share” is not an objective standard, nor is it a subjective standard either because it’s not even a standard at all. It is merely subjective whim masquerading as some golden absolute. The peg of “fair share” moves to whatever arbitrary point will bring in enough revenue to pay for whatever government largesse the proponents are seeking to fund. It is a completely backwards approach to budgeting that always leads to debt and/or higher taxes. It is based on the faulty premise of spending driving revenue requirements vs the economically sound approach of fixed revenue driving permissible spending.

The various tax systems (income, sales, property) today are a cesspool of unfairness from which we will never find a “fair share” lurking beneath their depths. The income tax system is based on a foundation of fostering wealth redistribution and behavior modification using the carrot/stick model. For example, every time someone gets a deduction or credit on their taxes it is because they are engaging in behavior the government wishes to promote (“there boy, good boy, you’ve been a good doggy”) and those that don’t get those deductions or in fact pay extra surtaxes are engaging in behavior the governments finds objectionable (“bad dog, bad dog!”). Deductions and incentives are one form of tax unfairness as they benefit one group at the expense of another. The other more sinister form of tax unfairness is progressive income taxation. There is no rational basis upon which one can argue that as one obtains more income they have progressively less right to keep that income. Few today realize that the idea of a progressive income tax is one of the primary tenets of communism*, its sole purpose being to destroy all wealth so as to more rapidly bring about the utopian order of the perfectly “fair’ communist society where all are “equal”. Oh, and yes, I did say “rational basis” for an argument. I don’t include the irrational ones like the argument that society has a right to tax the wealthy more because the only reason they are wealthy is because they have had at their disposal all the wonderful manna that has fallen from government run heaven (e.g. roads, public education, court system, etc). So, if all these things are what made wealthy people wealthy, then why isn’t everyone wealthy? These things are available to everyone, right? Or more to the point, based on this twisted logic one could argue that any tax rate imposed on the wealthy is fair. The argument doesn’t tie the value of these government services to some specific tax % therefore this argument can be employed for any tax %. Reductio ad absurdum.

When it comes to taxation the question of fairness must be broken down into two components: (1) the method and (2) the measure. To be considered fair the method must be (a) universal and (b) inescapable. A universal method is non-discriminatory and applies to every single citizen or non-citizen resident. Every. Single. One. An inescapable system is sufficiently transparent that it is not possible to hide one’s tax obligation. There is one tax system that would be universal and inescapable (hint: it’s not a sales/consumption/VAT tax). But, you’ll just have to wait until next week for the exciting conclusion when I reveal the identity of this new system and how it dovetails perfectly with the second component of tax fairness: measure.

* Manifesto of the Communist Party, Marx K., Engels F., 1848, Chapter 2.

A Wasted Protest

2011-10-21T08:12:00.002-04:00

The “Occupy <insert city name here>” protestors are certainly an eclectic bunch. From what I can gather they blame “the wealthy” and “corporate greed” (whatever that means) for a myriad of the problems this country faces, not the least of which is that they don’t have a job. Give me a break. If they have time to travel across the country and camp out in a park for weeks on end, then they have time to find a job. The protestors have one slender thread of a justifiable grievance: the “too big to fail” crony capitalist policies of our political system. The problem is that they should be protesting the government that bailed out big businesses (the financial and auto sectors). Those businesses made risky investments because they knew Uncle Sam would back them up if things went south. Ask yourself, if you could go into a casino and gamble as much as you wanted knowing that any losses would be repaid to you, would you really restrain yourself from not simply gambling as much and as fast as you could?

This protest is a wasted opportunity to raise national awareness of what really ails this country: big government. The protestors are simply too ignorant of basic economics (“let’s just get rid of all money” said one) and the nature of free-market capitalism (as distinguished from crony-capitalism) to advance any kind of legitimate, useful agenda. For example, some constructive demands would be:

1) end the Fed and the ability of the government to print money: this brings an end to the “business cycle” which is an artificial result of government money manipulation

2) end all government subsidies: this would lower taxes by eliminating corporate welfare

3) repeal all government regulation of business: this would put all the lobbyists out of work and would then create a boom in new businesses and new jobs (as regulations are the tool that big business uses to raise the barrier to entry by new competitors)

4) repeal all business taxes: a lack of income tax would create a huge increase in rate of return on invested capital thereby attracting thousands of US and foreign companies to the US which would in turn create millions of new jobs.

But you won’t hear any of the protestors calling for such reforms. Their solution to “income inequality” is not to raise those on the bottom up (by promoting an environment conducive to job creation) but rather to cut those at the top down (by promoting punitive taxation under the mantra of redistribution following a misguided appeal to “fairness.”) Income inequality is a natural consequence of being human. It is the same as inequality in a foot race. In fact the statistical distribution in both a race and income is identical: a handful are wealthier or faster than everyone else, a large portion are average and a handful are very slow or poor. Government mandated redistribution of wealth is no different than forcing the fast runners to carry sandbags on their back, so as to remove their “unfair” advantage over slower runners. Capitalism is like the foot race; those that come in first do not gain their speed by sapping the speed of the slower runners.

To insist that income must be equal for all or have a very narrow distribution is to tilt at the windmill of biology: we all have equal natural rights but we are not created with equal abilities. Those with skills in high demand or low supply (doctors, lawyers, actors, sports stars, etc) will always earn much more than those with skills in low demand or high supply. That’s life, get used to it. The solution the protestors should be seeking is to improve their skill set rather than promoting government-sanctioned solutions that use threat of violence (taxation) in order to “right” their perception of a “wrong.”

Decriminalize Immigration

2011-10-15T19:33:00.001-04:00

The idea of “illegal” immigration is a silly notion. It’s akin to an “illegal” vacation. Immigration is simply the act of moving from Location A to Location B. Why should permission be required to exercise this right? Up until 1882 (with passage of the non-euphemistically named “Chinese Exclusion Act”) anyone was permitted entry. Immigration laws were tightened further until 1921 when the Temporary Quota Act set “national quotas” and permanently criminalized immigration. And thus a legal harmless act was made “illegal” by arbitrary government fiat.

The RIGHT to immigrate (or emigrate) is distinct from the PRIVLEGE of citizenship. The basic idea is “you’re welcome to come and work and live here and support yourself but don’t expect handouts from the government… if you want a handout then you must become a citizen.” If immigration were properly viewed in this manner it would solve the issue of an overburdened social safety system. If only citizens can utilize the social institutions then you remove all incentives for those with parasitic intentions from immigrating. We would, however, have to change the antiquated citizenship laws that confer citizenship to those born on US soil. Citizenship should be a privilege reserved for those that meet the established criteria or the children of a US citizen.

The most common justification for restricting immigration is that they ‘steal’ jobs from Americans. Hogwash. They are doing the jobs that nobody wants. And when nobody does them, they don’t get done. For example, my family has been buying peaches from a fruit stand on Hwy 441 for several years and we have gotten to know the owners quite well. This past spring Governor Deal signed into law Bill 87 (which enacts severe penalties and mandates in order to curb illegal immigration). So this was the first growing season after that bill passed and recently one of the owners, Amy Bishop, remarked to us that the lack of immigrants had severely affected their business. There are simply not enough pickers. Food is rotting in the fields. The peach harvest was greatly diminished in both quality and quantity. She stated “I’ve thrown away more peaches this year then in 15 years, we lost, at our cost, over a 6 week span over $2000 just on peaches” (due to low quality from lack of tending and higher prices due to diminished supply).

With high unemployment you’d think the growers would have people lining up to work. Apparently not. When unemployment compensation can last 2 years it disincentivizes the unemployed to find work when such work might only equal or barely exceed what they already collect for doing nothing at all. Some say the wages for such “menial” jobs are too low to attract Americans to work them. Funny, the immigrants seem to get by just fine. Nevertheless, if the pay is “too low”, then I don’t understand the argument that jobs are being stolen? Stolen from the people that don’t want them?

Many immigrants fill a niche in our economy, the niche of the menial jobs that the native born don’t want. This has been true since this country was founded. The first generation is willing to do the hard work so that their children won’t have to. Removing the immigrants simply leaves those jobs undone, driving up prices. If we don’t want immigrants “mooching” off our big social safety net we need to either make the net smaller or require proof of citizenship for those wishing to partake in a government handout.

Public privacy?

2011-10-09T20:07:00.002-04:00

The Atlanta Journal recently reported (http://goo.gl/GJt5q) on plans to increase video surveillance in downtown Atlanta. This was quickly decried as an ever-greater violation of our privacy. That viewpoint rests on a faulty assumption, namely that our right to privacy extends into the public arena. In short, there is no privacy for public actions, only private actions.

The right to privacy is a natural right and as with all natural rights we must act in order to secure this right. Just as we work to secure our right to life, so must we work to provide ourselves with the tools that secure our right to privacy (e.g. shelter and clothing). Once these tools are secured, we have established our private-public boundary. Any uninvited breach (e.g. trespass, eavesdropping, thermal imaging, "peeping", personal searching, etc.) of that boundary is a violation of our right to privacy.

Once we exit the private realm and enter the public arena there is no longer a boundary (other than clothing) that can be breached. There is no reasonable expectation that we will not be observed or if we are, that it is incumbent upon any observer to cease such observation. Natural rights cannot obligate others to act in order for us to secure our rights. For example, the right to life is sustained by inaction of others (i.e. not killing us). Conversely the right to life cannot obligate others to act unwillingly on our behalf (i.e. provide us with food without anything in return). In the same way, a demand for "privacy" when in public would obligate others to act (e.g. cover their eyes and ears). No person has the right to forcefully obligate another to act on their behalf.

So, if it is unreasonable to expect people to shield their senses from us when we are in public, then: Is it ok for a person to observe another person in public? Is it ok for a person to draw what they publicly observe? Is it ok for a person to more efficiently draw what they publicly observe (e.g. use a camera)? Yes to all, but at this point some might hesitate and suggest permission is required or even "no". But why? It is an emotional response, as there is no logical difference between observing and drawing versus observing and snapping a photo. The latter is merely a more efficient tool to accomplish the former. I can dig a hole with my hands or with a backhoe. The backhoe is a whole lot more efficient, but both processes are still the same: digging.

Public cameras are merely tools that facilitate that which is unobjectionable (a cop standing on a street corner watching people) to be more efficiently accomplished. Legitimate concerns have been raised that public cameras are wasteful because they don't accomplish the desired goal in a monetarily efficient manner. Also abuse such as stoplight camera “gaming” (adjusting yellow light duration) is common. Inefficiency and abuse are valid reasons to object to such monitoring, but privacy concerns are not. If our laws only protected natural rights rather than trying to legislate behavior there would be little objection to such monitoring. Absent abuses of power or waste, we should be more concerned with the nature of the laws rather than the method of their enforcement.

Social Security = Ponzi Scheme

2011-09-28T14:41:00.000-04:00

Social Security is an inter-generational Ponzi scheme predicated on the assumption that population demographics would remain in a pyramid shape; a large base of workers supporting a tiny apex of retirees. The “baby-boom” generation changed all that: the pyramid now looks like the Washington Monument. In 1950 sixteen workers supported one retiree, today that ratio is a mere 3 to 1. By 2030 it will only be 2 to 1.*

The argument that Social Security is a Ponzi scheme is so common that the Social Security Administration actually has a webpage devoted to debunking this question: www.ssa.gov/history/ponzi.htm. Let’s analyze their arguments and see where they get it wrong.

1) A Ponzi scheme must offer extravagant returns. WRONG: Although extravagant returns are typical (otherwise why invest!) they are not necessary for it to be fraudulent. The fraud is that funds are not invested, reported returns are fictitious, and funds are stolen. The returns aren’t real so their magnitude is irrelevant. The “return” could be 5% and it would still be a Ponzi scheme.

2) A geometric increase of new investors is needed to sustain a Ponzi scheme. WRONG: Or rather only correct if ALL the “returns” are paid in cash. But not all returns are paid in cash. If statements show satisfactory returns then a majority of investors leave their money alone. To cover withdrawal requests it is necessary to procure new investors at a rate proportionate to the ratio of investors withdrawing funds to investors leaving funds alone. That rate is not geometric if the ratio is < 1.

3) Social Security is described as a “pay-as-you-go” program wherein “money from later participants goes to pay the benefits of earlier participants” and that such programs have an inherent vulnerability to “demographic ups and down.” RIGHT: These statements describe attributes that are true for both systems, so I’m not sure how this is supposed to support their argument. Mathematically there is no difference between the two systems: to be sustainable money going out must equal money coming in. It would be more accurate to say the cash flow of a Ponzi scheme functions by employing a pay-as-you-go system. So, if both systems’ sustainability depends on an identical cash flow model then the two systems are functionally equivalent. In other words, a distinction without a difference is no difference.

These are the common characteristics of both systems:

1) Funds are not invested, merely collected by the perpetrator (government)

2) Excess deposited funds (trust fund) are stolen (“borrowed” by government)

3) Required new funds = (excess funds) – (stolen funds) – (funds paid out)

New funds must equal the funds paid out because any excess is pilfered. As long as those values are equivalent both systems are “sustainable.” The problem arises when one of those values changes and equilibrium cannot be restored. A Ponzi scheme could last for forever if the perpetrator had the ability to compel new investors to join. Social Security has endured for so long only because of the government’s ability to legally force more people to participate and extract ever-increasing sums from the participants. At least in a Ponzi scheme the “investors” are not coerced with violence. With Social Security we have no choice. This is very odd indeed. If Social Security is such a wonderful, successful and loved program why is it not optional? Why is participation forced on us at gunpoint?

* www.cato.org/pub_display.php?pub_id=13625

Privatize Regulation and Relief

2011-09-14T14:44:00.000-04:00

The mainstream media misunderstands the role of the federal government as outlined in the US Constitution. They routinely ask questions to the libertarian leaning Republican candidates (Ron Paul, Gary Johnson) that betray this ignorance. For example, of the seven questions MSNBC asked Ron Paul at the last debate (Sept 7) four of them focused on this.

The questions presuppose that we need the federal government to provide a cornucopia of services that (mistakenly believed) the private sector could not provide. The underlying accusation in these questions is that if you don’t think the government should do these things then you must think no one should do these things and you are clearly a heartless SOB. To highlight the lack of imagination the questioner (Brian Williams) actually suggested that if the government did not run air traffic control then the only alternative would be that pilots would be doing it themselves in their planes! If he had employed a little investigative journalism he would have easily discovered that Canada actually privatized their air traffic control system in 1996 and has consistently received higher marks than the antiquated government run US system.

In short, the answer to this question is that just because one doesn’t believe the government should be providing a particular service doesn’t mean it should not be done. There is NOTHING that the government does that the private sector can’t do better. Not because somehow the individuals in the private sector are somehow magically smarter and better people. Rather because the private sector is constantly receiving feedback through the profit/loss system. Companies that provide things their customers want receive money and stay in business, companies that don’t lose money and go out of business. What remains are those companies best suited to provide the service. Government has no such feedback; failure is simply an excuse to ask for more money since obviously the failure was entirely due to a lack of money.

For those that believe “some things are just too important to let the private sector run them” and that therefore government must run them, then ask yourselves this: Why doesn’t the government nationalize our food industry? Why aren’t all farms and food processing and distribution government run? Why isn’t food allocated “equally” to local government grocery stores with “fair” prices? Surely food, that product without which we would all die, is important enough that we couldn’t possibly trust the market to handle it? Yes, government does stick its nose into agriculture quite a bit but certainly nothing on the scale of a nationalized government run monopoly of food distribution. Yet somehow the market, with no central planner, is able to magically make food available to everyone in this country. So if we allow the market to handle food (the most important of all goods), why then are we not willing to allow the market to handle other goods, such as education? Retirement? Air traffic control? Health insurance? Product regulations?

But what about drug safety, surely we need the government to handle this? Without the government those big mean drug companies would sell us drugs that would kill us, right? Drug companies would certainly be better off if only they were allowed to kill their customers <yes I’m being sarcastic!>. Rather than a single monopoly “FDA” we need several “FDAs” all competing with each other. The ones that do a good job evaluating drug safety and efficacy will profit and remain, and the ones that do a poor job (like the FDA that approved drugs that killed people, but for which they have no accountability) would go out of business. How would this work? We already have an existing model: Underwriters Laboratory. UL is a private organization that is not affiliated with any government. The UL inspired private regulation model is simple and works with any product or service.

Companies sell products. The products might cause harm so companies buy insurance. Insurance companies want to ensure against losses so they require companies be certified by a private certifying agency. If the certifying agency does a good job (preventing damaging products) they make money. The insurer is happy because they aren’t paying out claims. The company is happy because they aren’t getting sued. If the certifying agency does a poor job (allowing damaging products to be sold) then the insurer has to pay claims and the company is sued. That agency goes out of business because no one wants to use them anymore. The good agencies remain, the bad ones go away. It is a positive feedback loop of self-imposed regulations.

What about national disaster relief? Even easier – ever heard of the Red Cross? I think Ron Paul said it best – “What happened before 1979? We didn’t have FEMA.” Before 1979 did people just lay down and die because there was no federal aid? No, organizations like the Red Cross provided assistance as well as local groups that know their areas much better than the feds. FEMA has created a moral hazard that provides an incentive for people to not take responsibility for themselves (i.e. not buying flood insurance, building fancy homes on hurricane prone beaches, etc.). Private organizations like the Red Cross have a vested interest in seeing their efforts only go toward those that truly need help as they must answer to their donators. Donators don’t want to see their money wasted or swindled away as has happened with FEMA. FEMA answers to no one (or rather it answers only to a bloated government bureaucracy that can’t possibly keep track of the waste, fraud and abuse).

We who believe in liberty of the individual are caring for our fellow man. We do recognize the need for oversight of goods and services. We simply do not accept the proposition that government is the only way to provide such caring or oversight. We think it is the least efficient way to do so. The private market is the most efficient way due to inherent incentives that provide continuous positive feedback.

Privatize Marriage

2011-09-07T15:24:00.000-04:00

The right of association is the right to associate with whomever and for whatever reason we please. We can form businesses, churches, private clubs, unions, or a family. Although the US Constitution does not specify this right (the EU and Canadian ones do) I would like to believe all reasonable people would agree we have a right to associate with whomever we please. Oddly enough this “ignored” right still exists today. A man and a woman can live together as can two men or two women or a man and several women. Some may frown upon these associations but there are no laws prohibiting them. So if people can be with whomever they want, then what is the issue concerning non-traditional marriage? The issue is free speech.

Think of it like this: (1) Is it ok to associate with one or more persons? YES (2) Is it ok to publicly proclaim such an association? NO, or rather, it depends. This is true for marriage as well as for other associations. For example, a business can legally announce that it exists (incorporate) only if the business fits into a predefined pigeonhole established by the government (e.g. C-Corp, LLC, etc). Any other structure is “illegal”. Likewise for marriage.

When a couple marries they are saying to the world: “We publicly proclaim that we bind ourselves together and establish mutually beneficial rights and responsibilities – we no longer wish to be in a transient relationship but rather a responsible and enduring one”. The odd thing is that when government definitions of “permissible” associations ignore non-traditional marriage the message is: “Although you are attempting to enter in a mature and responsible relationship, we would prefer you keep it to yourselves and continue living in a manner consistent with a lack of commitment and responsibility.” In other words, attempting to engage in responsible behavior is ignored. Not permitting such public proclamation of the relationship is a restriction of free speech and clearly violates the 1^st Amendment.

If people want to associate (marry) that is their right. If a church will do so, great. If it won’t, then too bad (for the couple). The government should not compel private institutions such as churches to operate contrary to their belief structure. Additionally, their right to make such a proclamation does not mean anyone is required to accept it. The lack of use of force runs both ways. I may not stop you from speaking but that doesn’t mean I have to listen or agree with you.

Shifting gears from the political to the lexicological: words mean something. Changing definitions cause confusion. Redefining “marriage” would be like redefining “cars” to encompass motorcycles because they both have wheels and an engine. If the proponents of non-traditional marriage want a word to define their relationship they would do themselves a big favor by coining a new one; I (and others) suggest “pairriage.”

Government is currently the tool that defines what associations are permissible. Each side fights over the tool in an attempt to force their point of view on everyone. The solution is to get rid of the tool. Privatize all associations and remove from government its ability to define permissible relationships.

Birds of a Feather

2011-08-31T15:28:00.001-04:00

What kind of bird is the libertarian? Left-wing? Right-wing? The common misconception is that Libertarians are on the “far-right” of the political spectrum. Nothing could be further from the truth. The confusion stems from the total misuse and lack of understanding in the media of the terms “left” and “right”.

First we need to define our terms. What are we measuring? Let’s think of it like a ruler. What units would we have if the small numbers are “left” and large numbers are “right”? Units of State Control. To the left on our “control” ruler we have a value of zero, that is, a complete absence of State Control, or stated positively, it is complete liberty (from the Latin liberalis = free) for the individual arising from the condition of no outside force. So it then follows that as one moves to the right on this scale the degree of State Control increases. Thus, “extreme right” would be those societal structures employing totalitarian regimes in order to “keep the people in line” such as fascism and communism. It then follows that “extreme left” would be total anarchy. Libertarians thus naturally fall on the far (not extreme) left end of the spectrum because we respect the natural rights (life, liberty, pursuit of happiness) of the individual and reject the notion that the State can ever have a compelling interest to use force against the individual other than in preventing violations of natural rights. There are libertarians that use the term “anarchist” in various forms (min-archist, anarcho-capitalist, etc.) when describing themselves and so there are shades of respectful disagreement of opinion among libertarians (as with any human group) to the degree of which government should be permitted to exercise force; but make no mistake, there are no libertarians that would advocate complete anarchy, as that would by definition imply a lawless, consequence free society in which natural rights were ignored.

Where do Democrats and Republicans fall? Well, I have oversimplified things a bit. There is not a single scale by which to measure a society. Rather, there is a single scale (ruler) that you apply to multiple societal issues: work, welfare, abortion, marriage, drugs, schools, etc. A society’s degree of freedom can then be measured roughly by taking the value of all sliders in aggregate. On some issues Democrats are to the left (marriage) and on some to the right (welfare), whereas Republicans are on the left (welfare) and on some to the right (marriage). But both are to the right when it comes to Big Government, because Big Government allows “…the majority to embody their opinions in law.” * But, whenever their goals are in conflict they feign revulsion over “big government” and talk of limiting it. Of course this is only a tactic to limit their opponent’s ability to implement something they don’t agree with.

Since Libertarians never advocate state control (except when protecting natural rights), you will always find them on the left side of the slide rule for any given issue.

* Oliver Wendell Holmes Jr., Lochner v New York, 1905.

Economic Slavery

2011-08-26T18:51:00.001-04:00

I have a proposal. Since we as a society permit children to inherit the accumulated wealth of their parents (unless you are “too” wealthy, then we take half of it!) then isn’t it reasonable that children should also inherit the liabilities as well as the assets of their parents? Currently if assets exceed liabilities then there is a positive inheritance. If liabilities exceed assets then there is nothing to inherit and the creditors and thus society end up paying (by passing those losses onto everyone else). Surely the children should be the ones to carry the burden of those liabilities since they must have benefited to some degree while under their parents guardianship. After all the parents made a life long investment in their children, so it’s only fair that that investment pay off. It would not have to be overly burdensome; it could be paid back over decades. And if those children happen to pass on then they would simply pass those debts onto their children, and so on until eventually all debts are repaid.

Anybody think this is a reasonable and sound idea? I’m hoping not. I’m hoping everyone views it as completely unreasonable, unfair and immoral. For a child to be born into this world saddled with the obligation of repaying debt that they had no part in incurring is the a most insidious kind of indentured servitude.

So if we all (I hope) agree this is unreasonable, then why is it considered reasonable when a group of individuals (society) through their proxy (government) borrows and thus incurs liabilities that are then simply passed on to their collective progeny in perpetuity? We frequently hear about how terrible it is that we are passing onto our children our debts of today. Well, we’ve been doing this for a long time, and as one of those children from 40 years ago, I have to say I really don’t appreciate being asked to pay higher taxes now to pay off the debts incurred by our government during the Nixon – Reagan administrations. As a child I had no vote, I could not give consent either legally or mentally, and yet I and everyone else my age are now asked to pony up a whole lot more in taxes. The left pontificates that that is the “responsible” thing to do. Hogwash. I have no moral obligation in repaying debts that I did not even have a voice in. The “responsible” thing to do is to simply cut spending in non-critical areas. Surely EVERYTHING government does can’t be critical.

If something is morally wrong at the individual level then simple logic dictates that it is still wrong when a group of individuals does the same thing. Right now we have a nearly $15 trillion IOU that will have to be repaid at some point, but not by those that enjoyed the benefits of those debts, but rather by those that will have to greatly sacrifice their present benefits (lower standard of living) in order to repay that debt. That is simply another form of slavery: economic slavery. It must be abolished.

Stimulus: Bread and Circuses, Part II

2011-08-22T17:30:00.001-04:00

Government bread (stimulus) attempts to misdirect the citizenry into believing “something” is being done. Tragically, the bread is hollow. Inherent self-interest problems with government spending ensure that such spending is less efficient in terms of goods received per unit of money. In other words if government spends $1 they get 10 apples. If I spend the dollar I’ll get 15 apples. But there is another inherent problem with government stimulus – sustainability.

Government projects are always short term in nature (e.g. roads, bridges, etc) and when the project is done, that’s it. Those workers are out of work again… until we need some more bridges. Are we supposed to build bridges forever to keep the economy moving? Government spending is akin to a circus coming to town. Money is drawn into a community temporarily, and for awhile everything is great for local merchants. But clearly the circus is a bubble, it can’t stay in town forever. So it is a foolish business that expands based on the sales receipts generated while the circus is in town. When the circus leaves such a business collapses. It pleads for support from the government – the only thing they can do is bring the circus back. As long as the circus is there all is good. But clearly the circus is an unsustainable event, it was never meant to sustain an economy forever.

When people ask for government stimulus they are asking for “circuses” to maintain the status quo. Stimulus is supposed to spark some new more permanent venture, but exactly how can it do that? It simply reinflates the old bubble industries at their unsustainable bubble levels. Those industries can only be sustainable at their new post-bubble levels. Stimulus prevents this equilibrium from being achieved. Sustainable economic growth comes from industries responding to the direct desires of CONSUMERS. If consumers want it then a market will grow and that’s where the jobs will be. Consumer demand will not disappear overnight as can government spending. Consumer desires can change over time but it takes years for these changes to occur which is sufficient time for an economy to absorb the slowly shifting moods of consumer demands.

So this begs the question of why we had such a rapid change in the economy recently. If you’re astute you will have a good idea why. That’s right, it was a government-stimulated bubble inflated by loose fiscal and monetary policy and then popped by a reversal of that policy. It is these policies combined with the moral hazard of “too big to fail” that encouraged the RISKY behavior that is blamed for the crash. We must look beyond the risky behavior itself and ask what encouraged that behavior if we’re serious about preventing such things in the future. The solution is not to add more 20-20 hindsight regulation that attempts to prevent risky behavior but rather to remove the root cause that encouraged said behavior, namely the “too big to fail” policies of our crony-capitalist-big-government state. These polices are the manifestation of what government busybodies thought was the “right” thing (“home ownership for all!”) but sadly unintended consequences always come home to roost in a tragic mess. Treat the disease, not the symptoms.

Stimulus: Bread and Circuses, Part I

2011-08-11T10:14:00.001-04:00

The “cuts” in the recent budget deal have renewed mutterings of the “dangers” of decreasing government spending in a down economy. Somehow this “government spending as the path to prosperity” myth will just not die. The idea is that when government spends money it magically reaps greater economic benefits than when private parties spend money. Not only is this wrong, it is completely backwards! We’ve spent trillions in stimulus and it hasn’t “fixed” the down economy. No consideration is given as to why that might be, it is simply assumed that (a) we didn’t spend enough or that (b) it would have been worse absent stimulus. Argument A simply dumps us in an infinite loop from which there is no escape, akin to an old computer program like

10 RUN STIMULUS,

20 IF STIMULUS FAILS, GOTO 10.

Argument B is a sign of intellectual laziness as it relieves the arguer of a duty to supply any data to support their claim – just speculate on what might have been and call it a day.

Well, I’ll call that bluff. Using logic we can rationally discern a reasonable outcome of a lack of government spending. Let’s address the “multiplier effect” part of this myth first. In short no such effect exists. This “effect” is simply the relabeling of a normal function in the economy and claiming it is an inherently unique attribute of government spending. It has a more common name – trade. If I buy something then that enables the person I spent the money with to go buy something, and that person to do the same and so on. This happens everyday – if government rather than individuals spend the money it doesn’t magically transform the process into something else. When government stimulates by purchasing, the theoretically BEST possible outcome is no better than if the government did nothing.

All government spending by definition must come from the citizens. So in other words we are simply moving money from the left pocket to the right pocket of society. Citizen A had $1 and can spend it on X OR now government has taken the $1 of Citizen A and given it to Citizen B to spend it on Y. Citizen A does not have his $1 anymore so does nothing. Citizen B has the $1 and spends it. As Frédéric Bastiat explained, the “seen” benefit is what Citizen B bought; the “unseen” harm is what Citizen A did not buy. All we have done is shift the preference of goods that are being purchased in the economy. No net economic change has occurred.

But this assumes 100% efficient spending. Government has no inherent self-interest to efficiently spend money it distributes ($1000 hammer anyone?). Although the same AMOUNT of money is spent the goods and services received in return will always be fewer than had it been spent by someone with a vested interest in maximizing what they get for their money (i.e. the original owner). This net decrease in goods received per unit of “government” money spent lowers the overall standard of living and productivity of the economy over time. This obfuscation of the citizenry by government “bread” (i.e. handing out things that appear to be beneficial and good to some) is a vain attempt to do “something”. Next week we’ll continue with the “Circus” part of the stimulus equation.

Sweden, Sweden, Sweden...

2011-08-05T16:05:00.001-04:00

Recently my wife and I became embroiled in a “Facebook” debate with some of her liberal friends. I won’t bore you with the details as you can probably guess where they stood and where we stood! We were disappointed to learn, however, that when arguing with (some) liberals (many responded to the thread) if they can’t offer a counter argument they simply resort to (a) name calling or (b) answering questions with non-sequiturs or (c) invoking “Sweden”. Well, I probably can’t convince them to dispense with a & b, but at least I can poke some big holes in the Sweden myth.

The Swedish “social utopia” myth is basically a conflation of two independent phenomena (high growth and high taxes) and confusing that conflation as causation rather than correlation. High taxes (the cart) do not push the horse (high growth), rather the converse. In other words: a leaking boat takes time to sink, the length of time depends on the size of the boat and the leak, but eventually, if nothing is done, that boat will sink. Sweden did well in the beginning because it was a big boat with a small leak.

Sweden built up a strong capital base starting in the 1860s after several free-market reforms transformed it into an industrial powerhouse.* It also has been aided by the fact that they stayed out of both World Wars and thus avoided the catastrophic destruction of their economy that the rest of Europe endured. In 1932 the “Social Democrats” came to power and began implementing new “social” programs. These programs did not kick in fully until about 1950 at which point they had one of the highest per-capita income growth rates in the world. From 1932 to 1976 government spending grew from 10% of GDP to over 50%. Then the economy began to strain under the enormous tax burden. For about the next 20 years the government thrashed around trying to figure how to solve the stagnating economy. Eventually lowered tax rates and a number of free market reforms were implemented which resulted in an economic rebound in the last 10 years. Another myth is the low unemployment figures, but as they say there are lies, damn lies and statistics. In this case Sweden’s unemployment figures are manipulated by classifying people as “employed” who are on long-term sick leave, paid not to work or people pushed into early retirement. The real rate is closer to 25% without all the statistical sleight of hand.

The Sweden myth is the classic Bastiat example of “the seen and unseen” effects of an economic policy. We “see” the wonderful utopia of universal “free” goodies for all, but we don’t see the “unseen”: the consumption and destruction of previously saved capital (1860-1950) not being replaced at an equal rate. This net consumption breeds a society of dependency. The Swedes are slowly squandering their inheritance, as are we (ours, not theirs!). But being human (“kick the can down the road”) we most likely won’t figure this out until we are at the brink of destruction. Hopefully it won’t come to that.

* mises.org/daily/2259

Money doesn't matter

2011-07-31T16:14:00.001-04:00

Can one make too much money? Are the poor getting poorer? Will the rich amass so much wealth that it will leave none for the rest of us? No. Unfortunately affirmative responses are all too common and simply betray an ignorance of basic economics.

The mantra “the poor are getting poorer…” is a statistical sleight of hand reinforced by the notion that the economy is like a pie. The slice that the bottom 20% held in 2007 was indeed 0.3% smaller than it was in 1947*. But the pie has nearly tripled in size and thus nominal (inflation adjusted) income has more than doubled. In terms of standard of living the poor are even better off. We include in the definition of “poor” even those suffering from a mere dearth of the latest goods. But such a metric is misleading. In terms of creature comforts the “poor” are better off today vs just 50 years ago (e.g. ubiquitous home air-conditioning, inexpensive TV’s, game systems, iPods, smartphones, etc). Compared to even the wealthy of a hundred or two hundred years ago the poor are living like kings – indoor plumbing, refrigeration, plentiful food, washing machines, cars, telephones, and the list goes on. Measured on an absolute rather than relative scale the “poor” in most countries are better off today than in any time in history.

Now, to the first and last point – aren’t some taking “too much” of even this bigger pie? If a few get “all” the money won’t that make everyone else “poor”? To answer this, let’s assume the most extreme case: one wealthy person amasses 99% of all the money in the economy. Surely this is a terribly “unfair” scenario that must be prevented, right? Wrong. Why? How can anything get done with so little money? Easily (in a non-government manipulated economy). In this scenario money would be in HIGH DEMAND. Demand is proportional to price, thus “money” would have a HIGH PRICE. Price is the cost of one good in terms of another good. A unit of money will cost more goods than it used to. So if $1 cost a dozen eggs then now it will cost more eggs, lets say 120. So we go from $1/12 = 8¢/egg to $1/120 = 0.8¢. What has happened? Because dollars are in high DEMAND the PRICE of dollars in terms of other goods has gone UP, whereas the price of other goods in terms of dollars has gone DOWN. This is monetary price deflation and contrary to what the Fed might have you believe it is a good and natural thing. The rest of the people in the economy can go about their business producing and exchanging as they were before simply using pennies in place of dollars. It is production of goods & services that produces wealth, not money. The amount of money in an economy does not matter and has no effect on the productivity of that economy. As long as people continue producing, they can never be “poor” no matter how much the “rich” have.

*en.wikipedia.org/wiki/Household_income_in_the_United_States